A situation which is all too familiar to many in the construction industry is that you have finished a project and submitted your final account, but a few weeks later, you receive a payment certificate back with an unsettling phrase like “for discussion” and deducting substantial contra-charges against your account, effectively bringing the final amount payable down to zero – or even into negative figures.
In this article, we look at what this means and what you can do to get these contra-charges struck out. We will look at this through the lens of a contractor / sub-contractor relationship, but the same applies between employer and contractor.
What are contra-charges?
Contra-charges are essentially amounts of money that a contractor deducts from the amount otherwise payable to their sub-contractor. They are a form of set-off and can be levied for numerous reasons, usually:
- The cost of making good defective work.
- Delays attributable to the sub-contractor.
- Other damages that the contractor is passing down from the employer.
What about work that has not been completed?
Contra-charges should not be imposed for tasks that remain incomplete. In such situations, the contractor typically just withholds payment for the incomplete work. Nevertheless, the contractor sometimes not only withholds payment to the sub-contractor for work left undone but also applies a contra-charge for the expenses incurred in hiring another party to complete the work.
Effectively, this ‘double dipping’ allows the contractor to get the work done for free. Such practices are not likely to be permitted by the terms of the contract. It is imperative for sub-contractors to be aware of their rights and to challenge any such unfair practices.
When can contra-charges be deducted?
While it is possible for contra-charges to be applied at any stage of a project, they usually surface at the end, once the work is complete.
The reasons for this timing can vary. Sometimes, it is because the contractor uncovers legitimate issues or inconsistencies while reviewing the final account, which then warrant these deductions.
Frequently the imposition of contra-charges is tied to the contractor’s financial circumstances, rather than genuine issues caused by the sub-contractor. The contractor may have exceeded the project budget, and with the sub-contractor off-site and unable to verify whether the claims made are genuine, the contractor might resort to contra-charges to mitigate their overruns, which they are not entitled to do.
Challenging contra-charges
For practical purposes, it is not possible to stop a contractor from imposing construction contra-charges in the first instance, whether or not the charges are genuine. However, if the contra-charges are disputed, then the sub-contractor usually has the option to adjudicate against the contractor to establish the proper value of the deduction, which may well be £nil.
Fortunately for the sub-contractor, they do not have to prove that the contra-charges are false. Rather, it is for the contractor to prove that the contra-charges are genuine. To do this, the contractor must show:
- That there was some breach of the contract by the sub-contractor.
- That the contractor suffered a loss.
- That the loss they suffered was caused by the breach.
- That they have correctly quantified their loss.
This is not easy to do. We have seen contra-charge claims allegedly worth millions of pounds completely struck out because the contractor could not prove its entitlement to make those claims.
It is important to remember that if the charges seem excessive, you certainly have the right to challenge them.
Managing contra-charges
So, what should you do when faced with substantial construction contra-charges that you believe are unjust?
- First, try to negotiate. Open communication channels with the contractor to discuss the charges. Understand their perspective but also make your case, armed with any supporting documentation you have.
- Whilst they have the burden of proving their claims, any evidence that you have that contradicts them will be very valuable. You should collate all of this.
- Apply the same level of scrutiny as they would to you if they were assessing your variation or loss and expense claims.
- If negotiations do not yield a satisfactory outcome, you can consider adjudication or arbitration.
How CCC can help
Our team is here to support you at every step, from negotiation strategies to presenting a strong case in adjudication or arbitration. We have decades of experience in assisting parties to resolve disputed accounts, including:
- Disputed contra-charge claims
- Disputed variation accounts
- Disputed measured work accounts
- Disputed delay claims
Please contact us.
